Targeting Turnaround Candidates

 | Jun 04, 2013 | 4:00 PM EDT  | Comments
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liox

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cmls

There are times when the macro and technical chatter just gets to be too much for me, so I often retreat to my office, turn the phone off and run screens looking for situations with the potential for large returns. I am very much an individual stock picker -- most of the big-picture strategies just makes my head hurt. Although I have set screens that I use to find my core value positions, I am fond of switching up the variables and looking for stocks that might not fit my regular parameters but could provide explosive returns for aggressive investors. I don't always buy them but I have some friends, kids and readers who like these kinds of situations, so it's a worthwhile exercise.

On Monday night, I set the screener to look for stocks under $5 that could have huge earnings gains next year. Although I generally do not rely much on Wall Street analyst estimates, they can be useful. I am not looking for precise measurements of 2014 earnings but general direction and approximate magnitude.

As with every value or turnaround screen you could possibly create these days, the list is littered with mining companies, oil-and-gas names and other resources and material stocks. The great stock market conundrum of 2013 is how the end-users and retailers of these resources can keep going higher. We have covered many of these stocks with some frequency, so I dug a little deeper to finds some potential turnaround stocks outside these sectors.

Cowen Group (COWN), which is one of my holdings, offers brokerage, investment banking and asset management services. Involved in sectors with huge growth potential, including healthcare and alternative energy, it fits my value criteria and also has long-shot type potential. Although I was trying to avoid the sectors, this company  recently made an acquisition that gives it exposure to the mining and resources sector. A sector that has been this beaten up is almost guaranteed to see merger and restructuring activity over the next few years. The stock trades at just 80% of tangible book value and analysts are looking for earnings to more than double next year.

Lionbridge Technologies (LIOX) helps companies offer their products and services to the international market place. It offers language translation, global content management and other services that help companies go global. The continuing global slowdown in IT spending has hurt earnings in the short term, but things should pick up for this company when the economy eventually strengthens.

It will not make much this year but the consensus estimate for next year is many times higher than this year. If the company comes anywhere close to the projected eightfold earnings increase, the stock should take off as we move into 2014. Once the company gets back on track, the consensus expectation is that it will see earnings growth compound at 20x annually for several years.

Since its founding in 1998, Cumulus Media (CMLS) has done more than 150 merger-and-acquisition (M&A) transactions. This has them the faster growing radio broadcaster in the country and the second largest broadcaster over all. The company owns 525 radio stations and the ABC Radio Network, which serves more than 4,000 radio stations across the country.

The company has seen some revenue shortfall as the barrage of political ads finally came to a close after the election. Next year all the campaigning will start anew and analysts expect earnings to double in 2014. Some very smart private equity firms, including Oaktree Capital, Bain Capital and Canyon Capital, own this stock. None of them are selling and Canyon management has been a buyer this year -- so they must share some of the analyst's positive expectations for the company.

Digging in and looking for turnarounds help me shut out some of the constant market chatter during the day. I have found over the years that turnaround stocks tend to trade more on improvements or lack thereof in the fundamentals of the company and are less influenced by broad market movements that other stocks. This makes them perfect for aggressive long-term investors.

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